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The dollar is losing steam - Views on News from Equitymaster
 
 
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  • Dec 16, 2008

    The dollar is losing steam

    Dollar on the decline
    The adverse impact of the financial turmoil almost brought the US down on its knees with everything right from house prices to the economy as a whole heading southwards. But there was a notable exception to this which flummoxed everyone.

    We are talking about the rise of the dollar. While the world including the US was falling apart, the greenback incredibly gained considerable ground. This was more to do with the fact that investors perceived the risk of other countries to be higher than that of the US and hence the ‘flight to safety’ to the US dollar. The US economy has entered into a recession, but so has Japan and some countries of Europe. Even growth in the Asian countries has slowed down.

    To put things into perspective, the dollar’s rally lasted for four months gaining 24% along the way, as reported on Bloomberg. But the tables have now turned. The dollar has now begun to lose steam. The currency has weakened 5.9% measured by the trade-weighted Dollar Index after strengthening between July and November.

    The US is flooding the market with money to bail out the battered financial system. What it will do to the already ballooning deficit is playing an instrumental role in the dollar’s decline. In fact, Bloomberg reports that the consensus estimates for the dollar against the euro through 2009 have fallen.

    Europe is asking for auto aid
    The US seems to be setting an example for everybody. After the lifeline offered to the US auto industry’s Big 3 by the US government, the European automakers are now are hoping that that their respective governments provide some support to them too.

    According to reports by the European manufacturers' group and published in the International Herald Tribune (IHT), European new car registrations for October fell 14.5% from a year earlier. As a result, in the European Union, carmakers have called for support worth around US$ 53 bn. While the quantum of the support is subject to debate, it appears that governments have envisaged a broad range of measures. This includes providing the industry with low-interest loans.

    That said, the dire straits that the auto industry is finding itself in is not just confined to the US and Europe. Japan and the BRIC nations have not been spared either. As far as India is concerned, automakers too are seeing their volumes taper down. So, will India take a leaf out of the US and Europe’s book? Seems somewhat improbable considering Indian policymakers are caught up in their own future, which will be decided in the upcoming elections.

    The angst of investment banks
    While 2008 is a year that investment banks will dearly like to forget, the scenario will only get tougher in 2009. Firms such as Goldman Sachs and Morgan Stanley have been cutting jobs, foregoing bonuses and getting a slice of the bailout package but come 2009 and things are not likely to get any better as the declining demand for investment banking services will continue.

    As it is, these banks are expected to report losses during the fourth quarter and even if there is some semblance of a recovery in the stockmarkets in 2009, these will still have trouble growing due to their reputations having been tarnished. Thus, at the moment, investment banks regaining their former glory will seem like a long shot indeed!

     

     

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